LULU has seen consistent improvement in margins
Lululemon Athletica (LULU) has delivered strong financial results so far this fiscal year. Its earnings per share rose 10.4% during the first nine months of 2017, and the company exceeded Wall Street expectations in all three quarters. Strength in earnings has been driven by the company’s improving gross margin, which has increased over the last six quarters. Gross margins rose 110 basis points in 3Q17 after rising 180 and 110 basis points in 1Q and 2Q, respectively. Margin improvement was mostly a result of operational efficiency in supply chain processes, lower F&B costs, and higher average unit retail.
As a result of consistent improvement, LULU is among the higher margin sportswear companies. The company recorded a trailing-12-month operating margin of 14.8% as compared to 12.8% for Nike (NKE), 0.5% for Under Armour (UAA), and 8.8% for Columbia Sportswear (COLM).
Management expects gross margin improvement to continue well into 4Q and expects a 100 to 150 basis-point increase during the quarter.
How about 4Q17 earnings?
Management expects a healthy fourth quarter driven by a strong holiday season. “We are thrilled with our performance this holiday season that reflects an accelerating trend across all parts of our business, and we look forward to continued momentum in 2018 and beyond,” said Laurent Potdevin, former CEO of Lululemon in January while updating guidance.
The company has guided $1.25 to $1.27 in earnings per share (excluding the ivivva restructuring impact), reflecting a 26% increase at the midpoint. Wall Street projections are on the higher side of management expectations. Analysts have predicted $1.27 for 4Q17 earnings, up 27% YoY.
ETF investors seeking to add exposure to LULU can consider the First Trust Consumer Discretionary Alpha DEX ETF (FXD), which invests 0.9% of its portfolio in LULU.
Read the next part of this series to know about the company’s stock performance and valuations.